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Competition and Innovation: An Inverted-U Relationship

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  • Howitt, Peter
  • Griffith, Rachel
  • Aghion, Philippe
  • Blundell, Richard
  • Bloom, Nick

Abstract

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model—that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck—are both supported by the data.

Suggested Citation

  • Howitt, Peter & Griffith, Rachel & Aghion, Philippe & Blundell, Richard & Bloom, Nick, 2005. "Competition and Innovation: An Inverted-U Relationship," Scholarly Articles 4481507, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:4481507
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    References listed on IDEAS

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    JEL classification:

    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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